Analysis: The cyberpunks

Four years ago David Filo and Jerry Yang were a couple of unknown geeks. Now the boys from Yahoo! have outfoxed Murdoch, outsmarted Gates and have built a company worth $35bn and counting. And they've only just begun...

FOUR YEARS ago, when the Internet was in its infancy and online companies were still in their equivalent of the late Cretaceous age, a venture capitalist called Mike Moritz paid a visit to two young graduate students at Stanford University's engineering school.

Jerry Yang and David Filo had just about abandoned their PhDs to pursue an all-consuming hobby, organising and categorising pages on the burgeoning World Wide Web. They were not making any money out of it, but they did seem uncommonly adept at what they were doing and it did not seem too fanciful to help lift them and their little enterprise, already called Yahoo!, on to a commercial footing.

Moritz, a partner in the Silicon Valley venture fund Sequoia Capital, has never forgotten what he saw when he opened the door to the trailer on the Stanford campus where the two of them worked. The blinds were completely drawn, even in broad daylight. The generators for their computers were whirring and creating uncomfortable waves of heat. The answer machine bleeped almost incessantly. Strewn all around were golf clubs, dirty clothes and empty take-away pizza cartons. As Moritz later recalled: "It was every mother's idea of the bedroom that she wishes her sons never had."

But, in its own way, that trailer was also a peculiar reflection of Yahoo!'s abiding mission as it then was and remains to this day: a tool with which to create order out of the chaos of the Internet; a way of cutting through the cyberspatial fast-food and soiled laundry, if you will, to make it work for the consumer; and, above all, a temple of hard work, sheer enthusiasm and a near-monastic devotion to the cause.

The participation of Moritz and Sequoia Capital was only the beginning. What started out as a highly successful, cleanly designed search engine for web pages has evolved into something more complex and more central to the future development of online computer technology. Yahoo! is no longer content to transport users to the Web; it wants to be the Web, or at least so essential a part of it that most users will have no need to search further for their Internet needs.

Already, Yahoo! provides a comprehensive news service, a full financial information package on any company, including a monitor of its share price, access to 3,500 online retailers, e-mail services, Internet access and any number of smaller, more special interests from auctions to gambling. Thanks to a customised Internet home-page builder, it is now possible to make Yahoo! the first and, for many purposes, the only stop on the World Wide Web - acting as browser, search engine and service provider all in one.

There is nothing remarkable about wanting to achieve this kind of synergy. After all, this so-called bundling of various services is precisely what the US Justice Department's anti-trust suit against Microsoft is about. But, in contrast to Microsoft, Yahoo! has achieved dominance in its field without arousing the suspicions of government regulators - for the simple reason that it provides its services entirely free of charge to the end- consumer.

And it has done so in a number of ways that are indeed remarkable. First, it has built up the largest audience on the Internet, lagging just behind its somewhat differently focussed rival, America On Line. Secondly, it has - in contrast to other, smaller search engines being snapped up by large communications conglomerates - remained fearsomely independent and true to its origins as a hand-crafted, clear guide to the morass of information out there in cyberspace.

And thirdly, it has managed to turn a consistent profit. Unlike online retail specialists such as amazon.com, which have never shown black ink on their balance sheets and arguably never could, Yahoo! has, from the first days of its commercialisation in August 1995, managed to support its operations handsomely from advertising revenue.

Last year, it showed a net profit of $25.6m (pounds 16m) on revenue of $203.3m (pounds 127m) - admittedly, no more than a drop in the ocean set against the company's market capitalisation, which has shot up from around $10bn (pounds 6.3bn) four months ago to more than $35bn (pounds 21.9bn) now - but still a rare sign of bedrock business savvy in an industry that has looked, more than once in recent times, dangerously like a hi-tech version of the South Sea Bubble. Yahoo!'s success is due to a combination of factors. It rests perhaps most fundamentally on Yang and Filo's original concept of web page design and web categorisation based on intelligent sifting by human researchers rather than a simple machine-generated word-search. Yahoo!'s system of categorisation and sub-categorisation has been much copied, but no other company in its field still maintains a large staff (in Yahoo!'s case, just shy of 700) that struggles to keep up with the ever-growing avalanche of new pages on the Net.

Yahoo! was also quick to understand the importance of providing raw information rather than fancy gimmicks or pretty graphics. People could find what they want without having to wait several minutes for fancy photographs, colour backgrounds or elaborate banners to download on their screens. The second key factor is the company's business backbone. Several months before opening as a business three-and-a-half years ago, Yahoo! made sure it had a first-rate financial team in place, and Yang and Filo found what they were looking for in Tim Koogle, another Stanford engineering graduate with business experience at Motorola and at InterMec, the Seattle- based company that invented bar codes. Like the "chief Yahoos", as Yang and Filo still call themselves on their business cards, Koogle was blessed with a kind of primal curiosity and enthusiasm: he had put himself through college repairing the broken-down car engines of his richer fellow students.

Koogle, in turn, hired another bright young executive, a former member of the Canadian soccer team called Jeff Mallett who had solid experience in marketing software and telecommunications. Between them, they kicked Yahoo! into shape, first with the launch of the commercial service, then with various capitalisations leading up to the initial public offering in 1996, and beyond into the complex world of picking smaller companies to acquire and resisting takeover offers from much larger ones.

The key strategy that Koogle, Yahoo!'s chief executive officer, and Mallett, chief operating officer and now president, developed was to maximise Yahoo!'s free public access while waiting carefully for the right moment to introduce any kind of charges. When Yahoo! first introduced adverts in 1995, for example, some of its most faithful users complained about the company "selling out". But by that stage advertising was already common enough, and Yahoo! popular enough, that the risk of alienating users was long passed. The company faces a similar dilemma now, with the publicity benefits of, say, free e-mail services, needing to be weighed against making such services profitable. Some of Yahoo!'s more specialised services will probably be subject to charges soon, but it is a matter of extreme delicacy to determine when.

"If we can do a free service, that is our goal," Mallett said recently. For the moment there are still considerable mutual advantages to be reaped from big companies farming out their services on Yahoo! in exchange for the publicity and audience reach that both parties can enjoy. One recent example is Rupert Murdoch's News Corporation, which will be joining nine of its entertainment and news outlets to Yahoo! - not as a pre-emptive bid to buy the company, but merely as an exercise in joint promotion.

Back in early 1996, News Corporation had announced its intention to "bury" Yahoo! with the combined might of its own media resources, the Fox cinema and television networks and its own web service, the I-Guide. Murdoch's people had announced that the offensive would slay Yahoo! in 60 days flat, much as Time Warner subsequently threatened with their own product, Pathfinder. The fact that News Corp has now come to Yahoo! in search of an alliance pays eloquent testimony to the company's hardiness. The big conglomerates have been unable to pose a serious threat to Yahoo! because they jumped on the Internet bandwagon and, despite all their extraordinary capital resources, simply cannot hope to attract the same sort of following - in Yahoo!'s case, around half of all users of the Internet. The only serious competition, for the moment, remains AOL, particularly now that it has bought Netscape and has ambitions to set up a one-stop Internet service of its own. AOL traditionally tailors its services more to home computer users.

Yahoo! itself is in the acquisitions market, having recently snapped up GeoCities, a popular service for setting up personal home pages, and taken a stake in broadcast.com, which puts video and television footage on the web. The purpose of such acquisitions is to marry technology developed outside the company with Yahoo!'s uniquely flexible presentation and vast market - marriages that Koogle and Mallett have so far managed with great smoothness.

The secret of their success, Yahoo! says, is to have kept their feet firmly on the ground while negotiating the rapids of business on Internet time - the never-ending work cycle in which it is said that he who takes lunch ends up being lunch. Already, at this early stage in the industry, it seems that whatever the computer revolution brings, it's a fair bet that Yahoo! will be part of it.

EYEBALL ON A WEB WONDER STOCK

Chief Executive Officer: Tim Koogle

Chief Operating Officer, President: Jeff Mallett

Chief Yahoos (founders): Jerry Yang, David Filo

Employees: 700

1998 turnover: $203.3m (pounds 127m), up from $70.5m in 1997

1998 net profit: $25.6m (pounds 16m), compared with a $25.5m loss in 1997 due to large, non-recurring costs

Market capitalisation: $35.2bn (pounds 22bn)

Number of visitors to Yahoo! website in December 1998: 50 million